Reference no: EM132829645

In 20XX the stock market crashed and decreased in value by 47%. Jose and John each had $500,000 in a mutual fund that was now worth $265,000. Jose sold the mutual fund for $265,000 obtaining a taxable loss of $235,000. He took his $265,000 and invested in another fund that had also gone down 47%. His friend John told Jose he was crazy, pouring good money after bad. John pulled out his money and put it in the bank to earn 2% interest.

• In three years' time the market had gone back up. Jose's new fund was now worth $500,000. When the fund spun off taxable capital gains, Jose didn't have to pay tax on the capital gains because he had $235,000 in taxable losses to deduct again the gains. He could also deduct $3000 per year against his dividends to reduce the tax he had to pay on the dividends.

Problem A) How much money do you think John had?

Problem B) If you know you are going to need your money for college tuition or a down payment for a house within the next couple of years, should you put it in the bank or invest in stocks?